Smart contracts open up huge imagination space for blockchain applications

Recently, a hot word that everyone is talking about is "blockchain". After the hot and cold days of Bitcoin, there was a period of silence. Then, we saw the high-profile arrival of blockchain. The core technology system of Bitcoin is constructed on a certain type of blockchain. However, this time the fire of blockchain is not a simple comeback of Bitcoin, but a coming of "value network", "sharing economy" and "Internet finance".

Many of our friends who majored in finance may feel puzzled when looking at the brain-burning term "blockchain" which is full of "science and engineering" technical color. Does this word really have anything to do with us? If it does, why must we use such a cold vocabulary without financial connotation? In fact, for the Chinese translation of the English term blockchain, it is not that no one has thought of using a more business-like translation to replace it. In the naming vote conducted in the blockchain circle in China, there were options such as "account chain", "consensus chain" and "public trust chain", among which "public trust chain" actually received a lot of votes. However, the votes for these three options added together are not as many as the original "blockchain".

Why is this the case? There are three reasons:

(1) The dominant force in this field is still technical personnel. Technology is leading the business rather than obeying and following the business. If the technical color is erased from the name, it will be mismatched with the actual discourse power. Therefore, the majority of technical personnel instinctively resist.

(2) The application scope of blockchain may go far beyond finance and begin to penetrate into many areas of social life, such as notarization, e-government and P2P community ecology; the basic functions of blockchain may also go far beyond recording static data and gradually include executable data (smart contracts);

(3) Even in the financial field, blockchain first grew up in the non-mainstream "wild land" outside the main battlefield. It urgently needs a non-mainstream label, and "blockchain" without financial connotations happens to be a suitable choice. We expect that as the influence of blockchain continues to grow, this name will continue in the foreseeable future.

In terms of the origin of the concept, blockchain came first, and then Bitcoin. In terms of the popularity of the concept, Bitcoin came first, and then blockchain. When it comes to blockchain, we always have to answer a basic question: What is the relationship between blockchain and Bitcoin? I would like to summarize it in three sentences:

(1) Blockchain is the core technology of Bitcoin;

(2) The problem with Bitcoin is not primarily a blockchain problem;

(3) As an innovative technology, blockchain has positive value that cannot be underestimated.

Therefore, blockchain and Bitcoin cannot be confused, and the community that mines and speculates on coins cannot be confused with the community that uses blockchain technology to provide low-cost and highly reliable credit infrastructure services for various social activities. In fact, the concept of blockchain has taken away the eyeballs and venture capital resources that were thought to belong to Bitcoin, and in a sense, it is still a competitor to the concept of Bitcoin.

Although the application range is extremely wide, our sharing today still focuses on the function of blockchain on "accounts". Accounts are historical records of the generation and transfer of value. In the long historical evolution of human society, driven by scientific and technological progress, the information carriers of human beings on the generation and transfer of value have continuously evolved, forming a social division of labor pattern in which some people "keep accounts" and others "acknowledge accounts".

Based on the trust of the whole society in the credibility of the government and the endorsement of the government's credibility to specific "accounting" entities (such as traditional financial institutions such as banks), a series of "centralized" ledgers have been formed. However, once people doubt the credibility of the government, or the business extends to a place where the credibility is beyond the reach, this centralized accounting model and centralized ledger will no longer be usable.

There are four basic requirements for "bookkeeping":

(1) The content must be authentic and must not be forged or tampered with;

(2) The subject is clear and cannot be denied or counterfeited;

(3) The sequence is clear and the timing of value creation and transfer is rigorous;

(4) To be prepared for any eventuality, the account book not only has the original but also has several copies. The contents of the original and the copies are consistent. If the original is unavailable, the copies can be used as a replacement.

For "acknowledging accounts", four basic consensuses must also be established: consensus on the authenticity of the contents of the account books, consensus on the authenticity of the subject's identity, consensus on the chronological order between the accounts, and consensus on the consistency between the original and the copy.

In the digital world, the recording and acknowledgment of digital "ledgers" have an additional technical meaning. Especially when the subject of accounting and the subject of acknowledgment are in a relationship without a trust basis, technology (mathematics) is the only bridge to establish such trust. Use digital anti-counterfeiting technology to ensure the authenticity of the content, use digital signature technology to authenticate the identity of the subject, use chain structure to determine the order of data records, use distributed storage to establish a disaster recovery system architecture, and use the "consensus algorithm" determined by the majority to prevent the split of the ledger due to objective or subjective reasons.

Blockchain is a technical system that meets all these requirements at the same time.

In order to meet the needs of digital anti-counterfeiting, the Bitcoin blockchain uses the method of reversely seeking the special solution of the random hash function to establish a cryptographic cross-reference relationship between data blocks. The principle of cryptography ensures that there is currently no shortcut to obtain the special solution of the random hash function unless brute force is used. This is equivalent to embedding the "ticket stub" of the previous data block in the next data block. To calculate this "ticket stub", the previous data block must also contain a random anti-counterfeiting code determined by the business data and the ticket stub format.

The establishment of this cross-reference relationship is the proof of the use of a specific amount of computing resources (commonly known as "computing power"), also known as "proof of work". It can be imagined that the data blocks are strung together in this cross-reference way, which is the proof that their corresponding "computing power" is used in a given order. If the data on any data block is tampered with, this cross-reference relationship is destroyed. The computing power required to re-establish this cross-reference relationship is proportional to the interval between the destroyed data block and the current time. The older the history, the more unprofitable and incapable it is to tamper with it.

In order to meet the needs of identity authentication, the Bitcoin blockchain adopts a public key cryptographic system that does not require root CA to issue a signature. The value transferor of each record signs the record with his or her own private key to form a "verification code" field, which is put into the next record together with the public key of the value transferor of the next record. Therefore, each record is linked to the next record by its value transferor through "personally" issuing a "verification code".

In order to meet the demand for time sequence, the Bitcoin blockchain uses the method of connecting blocks through "verification codes" and connecting blocks through "ticket stubs" to form a complete time sequence. Of course, the chain structure is not the only type of time sequence. Some blockchain technology systems also use a "directed acyclic graph" structure that is not a "total order".

The consensus is reached based on the public agreement of mathematical verification methods, and adopts the principle of majority decision and long chain priority to ensure that the correct data is always in the hands of superior computing power or superior rights and interests.

In order to meet the needs of disaster recovery architecture, the Bitcoin blockchain adopts a competitive accounting method for the entire network. Within a block, for each record, one person "writes the book" and others "copy the book". Between blocks, there is competition for solutions and collective experience calculation. A peer-to-peer network without a central server is adopted, and computing nodes joining the network are dynamically open, allowing them to come and go as they please.

The Bitcoin blockchain is the oldest and most well-tested blockchain, but it is not the only one.

There are three types of blockchains: public blockchain, private blockchain, and consortium blockchain. Public blockchains are completely open, which can be said to be controlled by no one or controlled by all participants according to the rules. Private blockchains are controlled by a single equity entity. Consortium blockchains are controlled by several (generally closed) equity entities. Several blockchains can use the same technical system, but each has its own dedicated user group and operating examples.

Public chains must be "decentralized", private chains do not need to be "decentralized", and alliance chains can be "decentralized" to a limited extent. As for private chains, decentralization is not necessarily a problem. Decentralization means that its members "do not rely on mutual trust" and only rely on trust in mathematics, algorithms, and mechanisms to conduct business. "Decentralization" is different from "distribution". It is not a technical concept but a business concept.

Let’s take a look at the typical applications of blockchain: digital currency.

There are three types of digital currencies:

(1) Self-issued digital currency is a "wild" currency that is independent of the legal tender of each country and has an independent issuance rhythm, issuance strategy and independent exchange rate. A typical example is Bitcoin.

(2) Digital currency anchored to legal tender, which is equivalent to a "token" of legal tender and can be compared to various shopping cards and consumption cards. It can avoid complex payment interfaces and can be used directly for payment on the chain.

(3) Digital currency that is equivalent to legal tender. Perhaps the digital currency that the central bank is researching is closer to this.

Digital assets.

The following types of digital assets can be cited:

(1) Digital proof of asset rights in traditional capital markets, such as equity, debt, futures and options contracts, fund shares, and wealth management products.

(2) Certificates of bulk assets such as land deeds, house deeds, precious metals, and agricultural products.

(3) Digital artworks, gaming equipment, etc.

(4) Digital copyright.

In fact, a blockchain that includes both the registration and transfer of digital assets and digital currencies can host one or more exchanges. Although it does not include digital currencies, a blockchain that has a normal interface with the payment channel can also carry out asset trading business within the scope permitted by law.

Smart contracts.

Smart contracts are executable data records in the ledger. Their contents will be triggered and executed in a specific environment to complete specific business logic calculations. The triggering methods include time-driven (such as mortgage redemption), event-driven (such as will execution), condition-driven (such as gambling agreements), and cash-for-goods settlement (such as unmanned factories). Smart contracts are a major expansion of the "ledger" and have opened up a huge imagination space for the application of blockchain.

E-government and digital notarization. From what we have seen, blockchain has begun to be used in notarization, charity, elections, polls and other fields. (War-torn Ukraine is at the forefront of the world in using blockchain as election infrastructure).

Although blockchain technology is advanced and novel, most resources are open source and do not have high one-time procurement and deployment costs. However, the cost of continuous operation and maintenance, especially electricity and storage, is not low, at least for public chains such as Bitcoin. Blockchain technology has a high threshold and is generally dominated and led by technology. The traditional financial industry may not be able to adapt to this. For large-scale centralized matching of high-throughput, low-latency on-site business, the performance of blockchain cannot be compared with traditional high-performance trading systems. In addition, in the field of digital currency, the central bank has not made a clear statement, there are many uncertainties, and there are certain policy risks.

Personally, I suggest that the promotion of blockchain should start from the periphery and over-the-counter, from areas with low liquidity, low policy barriers, and low regulatory requirements, and from areas that do not involve fund settlement or have clear payment channel interfaces, when the digital monetary policy is still unclear. However, despite this, blockchain has received widespread attention from major banks, major securities firms, and major exchanges around the world. The call for the use of blockchain in the "main battlefield" of finance is still very high, and the international competition is fierce. There are a lot of opportunities here, both for technology and for business. I think that in the near future, blockchain will be mainly "well-received" in the main battlefield. In the vast periphery and over-the-counter, blockchain will be mainly "popular". You may wish to pay more attention and find your own opportunities. I have now withdrawn from the Shanghai Stock Exchange, and there is no inconvenience in the system for engaging in blockchain-related businesses. I hope that interested colleagues will work together to promote this cause.

This article is a transcript of the speech delivered by Bai Shuo, former chief engineer of the Shanghai Stock Exchange, at the "First Financial Technology and Innovation Conference" on May 31, and was edited by Zero One Finance.